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The evidence that supports these
conclusions is in the report itself, but
we’ve summarised the findings here.
There’s a more detailed summary in the
executive summary on page 10.
Fundraising is strong and there’s a
good investment case for VCTs
Lower pension limits mean that more
advisers are considering VCTs
Pension freedoms could have a
similar impact as advisers use VCTs for
tax-efficient decumulation
The 2015 summer Budget means
some providers will need to invest in
earlier stage companies and / or change
their risk profile
The government supports the VCT
scheme, along with the EIS and SEIS
schemes
Expect charges to be significantly
higher than mainstream funds, usually
with justification, but advisers must
check if they represent value for money
By addressing the funding gap
VCTs support small and medium sized
businesses which in turn create growth
and new jobs
There is a variety of options for
VCT investment to suit a number of
objectives and risk profiles, from high
growth to income, capital preservation
and Limited Life
We think that VCTs are set for an
increase in business over the next few
years. Perhaps the recent changes will
hamper the efforts of some VCTs this
fundraising season as they adjust to the
new legislation announced in the 2015
summer Budget, but the changes in
pension limits, continued low interest
rate environment and ongoing economic
recovery will see more advisers and
investors considering VCTs.
Pension freedoms and the possibility
of many more clients at retirement
choosing some variety of decumulation
and drawdown, rather than an
immediate annuity purchase, also mean
that VCTs will be in demand as tools to
implement tax-efficient decumulation
strategies. The lack of financing for SMEs
means that there is a lot of deal flow
for VCTs, and great value to be found
investing in the sector. We think that
there could be something of an ‘illiquidity
premium’ over the next few years as
patient investors make returns in areas
like small and medium sized enterprises,
and jumpy investors in mainstream
markets are shaken out by regular bouts
of volatility. Finally, tax-free income is
always going to be attractive – where
else can tax-free investment income be
secured?
There are a handful of things the VCT
industry is doing to take advantage
of this favourable situation. Providers
will get onto adviser platforms (Puma
and Octopus have done so already),
which will make the business process
much easier for advisers, but may have
questionable value for investors. The
best VCT providers are also committed
to managing their discounts and
encouraging the development of a
secondary market, both steps that
address exit risk and will help encourage
new investors into the market. Limited
Life VCTs also help to address this issue.
On the negative side, charges remain
high compared to mainstream options
however, and though these are
justified by the work that is involved
investing in smaller companies, some
of the performance fees might favour
the managers at the expense of the
investors. Providing more clarity on the
fees and incentives might be the biggest
step the industry could take to secure
the confidence of a new generation of
investors, but this has been a complaint
about the industry for years – with little
sign of progress.
Overall though the outlook is really
positive. VCTs support a vital part of
the British economy, helping to plug
the funding gap and put capital to work
in business that really need it, and can
turn it into outputs that contribute to
the real economy as well as increasing
shareholder value.
FINAL CONCLUSIONS
“VCTs play an important role in financing our country’s small companies as they seek to develop new and
exciting technologies and products. Supporting these companies is an inherently risky business, something
the government acknowledges through a series of generous tax reliefs”
Oliver Bedford, Hargreave Hale